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Executive Summary
This note provides a tax advisory analysis of the recent Supreme Court ruling in Hyatt International South Asia Ltd v. DIT (2024), with a focus on its implications for Global Capability Centre's (GCCs), BPOs, KPOs, and captive units operating in India. The judgment significantly expands the scope of what constitutes a Permanent Establishment (PE) under Indian tax law and tax treaties, especially in cases where strategic and operational control is exercised by the foreign principal over Indian operations.
The ruling reaffirms a “substance over form” approach and makes it critical for multinational businesses to reassess their existing business structures, reporting hierarchies, transfer pricing positions, and contractual frameworks.
2. Background – The Hyatt Case
The Supreme Court in Hyatt International South Asia Ltd upheld the Revenue’s stand that the Indian operations of Hyatt constituted a Fixed Place PE and an Agency PE, despite a formal contractual structure that distanced the foreign entity from day-to-day control.
Key Determinants Highlighted:
The foreign entity (Hyatt US) exercised functional control and supervision over India operations.
Staff in India reported operationally to the foreign principal.
Emails and directives indicated that India was executing business decisions of the foreign entity.
Brand value and entrepreneurial risk were retained by the foreign principal.
The Court emphasized real and continuous control rather than mere legal documentation.
3. Risk Analysis for GCCs, BPOs, and Captive Centres
Given the business models typically adopted by GCCs and captives in India—often structured as cost-plus entities with a “limited risk” characterization—the Hyatt ruling necessitates a review in light of the following:
| Risk Factor | Exposure Post-Hyatt |
|---|---|
| Direction from HQ via emails/calls | High risk of Agency PE |
| Seconded employees functionally under HQ | Triggers DAPE or Fixed Place PE |
| Shared IT infrastructure and control | Increased audit attention |
| Joint approvals / policy enforcement | Control attribution to foreign PE |
| Undocumented operational influence | Harder to defend in audit |
4. Key Tests for PE Post-Hyatt
The judgment sets the following practical tests to identify PE presence:
Test of Control: Are Indian employees following directions from HQ in substantive business matters?
Test of Premises Use: Is the Indian office being used to carry out core functions of the foreign principal?
Test of Risk-Bearing: Who bears the entrepreneurial and financial risk for Indian operations?
Test of Functional Reporting: Who the Indian team reports to in practice, irrespective of contract language.
5. Action Points and Advisory
We recommend the following steps to mitigate tax risks and ensure PE compliance:
A. Operating Model Review
Recharacterize the India entity’s role if substance differs from contract.
Evaluate feasibility of converting to an independent service provider model.
B. Transfer Pricing Alignment
TP positions must reflect actual conduct; inconsistency may attract secondary adjustments.
Consider filing for Advance Pricing Agreements (APA) or safe harbour, if available.
C. Governance and SOPs
Create Standard Operating Procedures (SOPs) delineating India’s decision-making autonomy.
Avoid overlapping authority in documentation and internal communications.
D. HR & Secondment Structuring
All secondment contracts should be reviewed.
Seconded employees should not retain any foreign employer authority or KPIs tied to overseas performance.
E. Digital Audit Trail
Maintain logs and records to evidence independence (email policies, dashboards, data access logs).
6. Suggested Immediate Deliverables
We propose undertaking a structured review comprising:
PE Risk Assessment Diagnostic – Interviews, workflows, reporting lines
Contractual and Email Trail Review
Transfer Pricing Alignment Study
Secondment Structuring Memo
Tax SOP Framework for Internal Use
Presentation to CXOs / Board
7. Conclusion
The Hyatt judgment is a judicial signal of changing tax administration philosophy in India. PE is no longer determined by just legal contracts or place of business but by control, risk, and execution. GCCs and captive centres must proactively realign their business models to mitigate tax risks and potential litigation exposure.
We would be pleased to schedule a workshop or management session to discuss this further and assist with necessary restructuring and compliance documentation.
Warm regards,
Amit Aggarwal
Chartered Accountant
